FOREX-Euro hits four-year low vs dlr on bad loan fears

LONDON, June 1 (Reuters) -The euro fell to a 4-year low against the dollar on Tuesday as fears the euro zone's debt crisis could spread to its banking system hit the single currency, while deteriorating sentiment supported the greenback.

The European Central Bank warned on Monday that euro zone banks faced up to 195 billion euros in a second wave of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro zone government bonds. [ID:nLAG006303]

At 0930 GMT, the euro was trading with losses versus the dollar of around 1.3 percent at $1.2120 after dropping to a four-year low of $1.2112.

Traders said stop-losses were targeted under the previous low at $1.2143, while technical analysts highlighted the break below key support at $1.2135, the 50 percent retracement of the 2000-2008 rally.

A daily close below $1.2135 was key for further downside potential, while options traders noted significant barrier interest at $1.2000.

The euro's close on Monday marked its sixth consecutive monthly decline, the longest losing sequence the single currency has experienced since 1999, just after its inception.

Growth concerns were heightened as euro zone manufacturing activity expanded in May at a considerably more sluggish pace than April's 46-month high, a survey showed. [ID:nSLAVGE65K]

Versus the yen, the euro traded with losses of around 2 percent at 110.15 yen. It also slipped to an 18-month low versus sterling EURGBP=D4 of 83.78 pence.

The euro is still reacting to negative issues, said Ian Stannard, currency strategist at BNP Paribas, adding Spain's downgrade by Fitch last week was also weighing on the currency.

Fitch Ratings cut Spain's credit ratings to AA+ from AAA on Friday, saying its economic recovery would be more muted than the government forecast. [ID:nLDE64R1ZE]

RISK AVERSION

The Australian dollar was knocked after approvals for building new homes dived in April, backing bets the Reserve Bank would not raise interest rates again soon. [ID:nSYU010019]

The RBA held rates at 4.5 percent but traders watching for hints it might hold rates steady for the coming months only got a statement saying that policy was appropriate for the near term. [ID:nSGE650052]

The Australian dollar slipped around 2 percent to trade at $0.8300.

China's official purchasing managers' index fell to 53.9 in May from 55.7 in April. Australia's heavy reliance on trade with China makes it sensitive to Chinese indicators.

The dollar was up around 1.0 percent versus a currency basket .DXY at 87.044, its highest since March 2009, as European equity markets followed Asian stocks into negative territory.